Covance shareholder sues over $6.1B LabCorp deal

A Covance Inc. investor contends in a lawsuit that the drug-testing company’s board erred in relying on what the shareholder called Goldman Sachs Group Inc.’s conflict-tainted advice in accepting a $6.1 billion takeover offer from Laboratory Corp. of America Holdings.

Covance’s directors shouldn’t have hired Goldman Sachs as its financial adviser for LabCorp’s more than $105-a-share offer because the investment firm already represented another company Covance was considering acquiring, the investor said in a Delaware Chancery Court lawsuit. That created a conflict of interest, the shareholder alleged.

Princeton, New Jersey-based Covance manages clinical trials and other aspects of development for drugmakers including Indianapolis-based Eli Lilly and Co. The company has major laboratory operations in Indianapolis and Greenfield that employ about 1,500 people.

Goldman Sachs, which isn’t a defendant in the case, has been criticized in the past for mishandling potential conflicts and created a business-standards committee in 2010 to review operations. Two years later, a Delaware judge rebuked the New York-based firm for “incomplete and inadequate” handling of a conflict in case involving the merger of oil-pipeline companies Kinder Morgan Inc. and El Paso Corp.

By advising Covance directors to accept LabCorp’s offer, “Goldman Sachs succeeded in maximizing its own interests and the fees it can attain,” Bary Berk, the shareholder, said in a suit filed Monday in Wilmington, New Jersey.

Paul Sundez, a Covance spokesman, and Stephen Anderson, of Burlington, North Carolina-based LabCorp, didn’t respond to phone and e-mail messages seeking comment on the lawsuit. Michael DuVally, a Goldman Sachs spokesman, wasn’t available for comment.

Clinical tests

LabCorp, provider of more than 4,000 clinical tests, agreed in November to hand over cash and stock valued at $105.12 a share to acquire rival Covance.

While LabCorp processes patient samples for doctors and hospitals, Covance helps drugmakers such as Lilly and Sanofi run clinical trials for their medicines. The deal is designed to give LabCorp new revenue sources and broaden its customer base, officials said.

The company acquired Greenfield Labs from Lilly in October 2008 for $50 million and a 10-year agreement from Lilly to use Covance’s services. The company announced a $150 million expansion in 2012 that was expected to create an additional 465 jobs in Greenfield by the end of 2022.

In his suit, Berk contends Covance’s board failed to properly shop the drug-testing company around for the highest bidder and relied on tainted advice from Goldman Sachs in accepting LabCorp’s offer.

Covance directors originally sought to hire Goldman Sachs to help it market the company after getting an offer from an unidentified company, but the New York firm was already representing a firm Covance was considering buying, according to the suit.

The directors hired Citigroup Inc. bankers to serve as financial advisers on the potential acquisition of the unidentified firm, Berk said in the complaint.

Lucrative fee

Despite the potential conflict, Covance’s board hired Goldman Sachs to help evaluate buyout offers, according to the suit. That raised questions about the neutrality of Goldmann Sachs’s advice about which option was best for the drug-testing firm, Berk said in the complaint.

If Covance decided to make an acquisition rather than be bought, “Goldman Sachs would lose” lucrative engagement fees, according to the suit. If LabCorp’s offer for Covance is consummated, Goldman Sachs stands to reap about $40 million in fees, Berks alleged.

Goldman Sachs, which has faced criticism about its management of potential conflicts of interest, moved in September to bar investment bankers from trading individual stocks and bonds, a person familiar with the policy change told Bloomberg News.

Bank’s policy

The change came after a former Federal Reserve Bank of New York official alleged she was fired in 2012 because she refused to change her finding that Goldman Sachs didn’t have a formal conflict-of-interest policy. That suit was later thrown out.

That same year, former Delaware Chancery Court Judge Leo Strine took Goldman Sachs officials to task for their work on behalf of El Paso in the $21.1 billion takeover by Kinder Morgan.

Goldman Sachs, which served as El Paso’s financial adviser, had a $4 billion stake in Kinder Morgan and two employees on its board at the time of the deal. It was advising the pipeline company on a related deal at the same time.

‘Questionable aspects’

The investment firm’s lead banker on the deal also failed to disclose his ownership of $340,000 worth of Kinder Morgan stock, according to court filings.

El Paso shareholders said the conflicts tainted the case and Strine, now the chief judge of the Delaware Supreme Court, said there were “questionable aspects” to some of Goldman Sachs’s evaluations.

Kinder Morgan officials later agreed to pay $110 million to settle El Paso investors’ claims over the deal and Goldman Sachs executives agreed to forgo a $20 million fee tied to acquisition as part of the accord.

In the Covance case, Berk is asking a judge to block the deal from proceeding until Covance and LabCorp officials make additional disclosures about the deal.

Please enable JavaScript to view this content.

Story Continues Below

Editor's note: You can comment on IBJ stories by signing in to your IBJ account. If you have not registered, please sign up for a free account now. Please note our updated comment policy that will govern how comments are moderated.

{{ articles_remaining }}
Free {{ article_text }} Remaining
{{ articles_remaining }}
Free {{ article_text }} Remaining Article limit resets on
{{ count_down }}